It’s been a challenging five years for property fund investors, with the credit crunch hitting hard, and there is a wide disparity amongst property investment companies when it comes to fund ratings. A number of the higher yielding companies are on premiums (worth more than the value of their underlying assets), perhaps not surprisingly in the current low interest rate environment. Some others are on higher than average discounts. What is the outlook for the property investment company sector – what should investors be looking at?
The Association of Investment Companies today hosted a press roundtable lunch on the outlook for the property sector with Robert Boag, Manager, UK Commercial Property Trust and Marcus Phayre-Mudge, Manager, TR Property Investment Trust. Their views have been collated alongside other managers from the sector.
Given the challenging economic backdrop, Richard Kirby, Manager, F&C Commercial Property Trust believes it is “more important than ever for investment decisions to be driven by local markets, individual streets and stocks, rather than geographic weightings and to have a strong focus on the quality of the covenant”. Jason Baggaley, Manager, Standard Life Investments Property Income Trust concedes that “care is still required” and that “Supply remains low for good quality accommodation in most markets”, but that this creates opportunities for managers to add value for investors. Michael Morris, Chief Executive of Picton Capital, Managers of Picton Property Income believes commercial property prices outside central London are at levels last seen during the 1990's, providing interesting opportunities (see pages 2/3 for their full views).
Property offers attractive yields
Robert Boag, Manager, UK Commercial Property said: “Direct property investment has remained competitive against other asset classes over the long term. This resilience is attributed to the solid income return the asset continues to deliver which offers protection against inflation. In recent times it has reasserted its credentials as a genuine diversifier of investment risk between asset classes.
“There are a number of issues for investors seeking exposure to the direct UK property market which can be achieved in a number of ways and are dependent on the investors’ investment horizons, tax status, liquidity requirements and attitude to risk. The Offshore property investment sector and UK Commercial Property, in particular, offer investors a tax efficient exposure to the UK real estate market with a focus on delivering an attractive dividend /income yield to investors.”
TR Property strongly favours Europe over UK
Marcus Phayre-Mudge, Manager, TR Property, said: “European property shares outperformed the broader European equity market in 2012 by 10.04%. Investors have begun to appreciate that many listed property companies not only offer access to quality real estate but also now have appropriate balance sheets having rebuilt them post the crisis. The average loan to value across the EPRA European universe is 46%. Very importantly listed companies have been able to access debt not only through the usual banking channels but also via public markets as well as new lenders such as private placements in the US and insurance companies. All of which allows their marginal cost of debt to fall. This is a world away from the over-indebted zombie private property company owning secondary assets and limping along in the hands of the banks. The other key feature of this market is the dispersion of returns – investors need exposure to those submarkets across Europe which are experiencing rental growth such as Germany, Scandinavia, London and central Paris. There is no expectation of decent returns from a portfolio of regional offices in the UK.”
Prime property in established locations
Richard Kirby, Manager, F&C Commercial Property Trust, said: “F&C REIT’s expectations for the future would appear to suggest that property performance is set for a gradual improvement, with total returns over five years averaging approximately 8% pa compared with a 6.3% pa ten year historic average.
“The domestic market is characterised by sluggish GDP growth, squeezed household incomes, fiscal austerity and structural changes to the pattern of retailing, such as the growth of online spending. Added to this is the trend to shorter leases, monthly rents and cost sensitivity among occupiers. None of this bodes well for rental growth, especially in real terms, but property can still offer opportunity. The UK has also seen low official interest rates and exceptionally low gilt yields, which has kept property pricing attractive. Prime yields can still show value at these levels.
“Problems in the wider world have led to higher levels of risk awareness among investors. This has produced a focus on prime property in established locations and core property investment markets. This has benefited the UK, which, in 2012, attracted substantial inflows of money from overseas, especially to London. The rise of the overseas buyer looks set to continue. While some recent purchases may reflect a “safe haven” element, property investment is becoming more globalised.
“This backdrop has made it more important than ever for investment decisions to be driven by local markets, individual streets and stocks, rather than geographic weightings, and to have a strong focus on the quality of the covenant.”
Care still required – but investor interest on the up
Jason Baggaley, Manager, Standard Life Investments Property Income Trust, said: "We are seeing increasing interest in the real estate investment market and buyers are looking across the risk spectrum, from prime long let income to secondary real estate. Pricing for secondary has started to stabilise at a transactional level and yields are beginning to look more attractive in some markets. Care is still required and buying secondary assets needs to be undertaken on the asset fundamentals. Supply remains low for good quality accommodation in most markets, which gives opportunity to add value for investors."
Michael Morris, Chief Executive of Picton Capital, Managers of Picton Property Income commented: 'With commercial property prices outside central London at levels last seen during the 1990's, we believe that the current market dynamics are providing interesting opportunities that have upside potential, despite wider market conditions. Stock selection and good asset management is key."
Don’t get carried away by dividend yields
Annabel Brodie-Smith, Communications Director, Association of Investment Companies (AIC) said: “The investment company sector offers a good selection of choice for property investors, from those with a UK focus through to Europe and Asia Pacific, and from direct property exposure through to an emphasis on property shares. The closed ended structure of investment companies makes them particularly well suited to investing in illiquid assets such as property, because managers do not have to sell stock to meet redemptions. Whilst there are some attractive dividend yields in the property sectors, it is important not to get carried away with yield alone. It is very important to look at the portfolio composition of the company, and also gearing (borrowing) levels, which can be significantly higher in the property sector than the average investment company.”